The Taliban will face the same economic challenges as the previous regime but under sanctions.

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TeaThere are optimistic suggestions that Afghanistan’s hard-won integration into the global economy will remain despite Taliban dominance and a US withdrawal. Many commentators have suggested that China – which the Taliban has declared its strongest ally – could become Afghanistan’s primary economic backers and help the country remain part of the global order. That analysis is unrealistic.

For one, it ignores the sanctions regime imposed by the international community on the Taliban. Those restrictions apply not only to financial transactions but to business people as well. All companies – not just banks – must adhere to the framework against the financing of terrorism and money laundering. The Central Bank of Afghanistan (DAB) – which I chaired until the fall of Kabul in August – worked with its international partners to restrict such transactions. Now, Afghanistan under the Taliban and the DAB are likely to be regarded as institutions accepted by the rest of the world.

In addition to the financial implications, this situation will have three additional consequences.

First, Afghanistan’s physical money supply will be disrupted. This is because the central bank does not print its own currency: the DAB usually receives afghanis produced by specialist firms abroad. The bank expected 2 billion Afghanis in small denomination notes from a Polish currency company in August. It also signed a contract with a French firm to supply another 100 Arab Afghanis for the following year. I am relatively certain that these deliveries cannot be done.

Second, the $7 billion Turkmenistan-Afghanistan-Pakistan-India Natural Gas Pipeline Project (TAPI) will not go ahead. The pipeline brings 33 billion cubic meters of natural gas annually from the Turkmen Galkynysh field – the world’s second largest – to Pakistan and India. This would have generated a few hundred million dollars in transit revenue for the government of Afghanistan.

I know this issue very well because for five years I was the representative of Afghanistan on the board of the project. I helped move the pipeline from a vague goal envisioned during the previous Taliban regime to a realistic project. The engineering work was completed, bilateral agreements were signed and the process of land acquisition started. The project company had enlisted several European firms to supply steel piping, valves and construction work. We had also identified financing from various export credit agencies and insurance companies.

A Taliban delegation visited Turkmenistan earlier this year to assure the government there that the Taliban regime would provide security for the pipeline. I remember that visit because on the same day a car bomb exploded in Kabul under the leadership of TAPI Project Manager. (Fortunately, he survived.) In any case, whatever assurances the delegation gave to Turkmenistan, the Taliban does not fully understand the complexities of the project. As a result of the sanctions regime and security concerns, European companies will not be able to provide equipment or financing. They certainly won’t be able to get insurance for the project. For now, the project is to be considered dead.

Third, profit expectations from the country’s mineral resources would have to be reduced – or abandoned. This includes the Aynak copper mine, one of the world’s largest untapped sources, which was acquired by the Metallurgical Corporation of China in 2008. Or the Hajigak iron ore mine, a mine with world-class iron ore content, for which an Indian firm signed a contract. There is also the Amu-Darya oil basin, where the National Petroleum Corporation of China has the right to drill. Each of these projects requires international funding and much more. It is unlikely that any reputable company would be involved in such projects now. The risks are simply too high.

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impact of low fiscal space

In addition, economic programs that support trade are likely to be cut. As economic adviser to the President of Afghanistan, I developed an air cargo support program that helped increase exports by more than $100 million per year. We exported pine nuts to China, fresh fruits to India, rugs to Turkey and handicrafts to Europe. However, with less financial space, it is likely that government support for these air corridors will become untenable.

There are analysts who suggest that the Taliban may turn to Islamabad for help. But Pakistan’s economy is hardly up to the challenge. Pakistan has international reserves of only $ 20 billion. Although this is twice as much as Afghanistan, Pakistan has to deal with a whopping 14 times the GDP. What’s more, the country has a 90% debt-to-GDP ratio, which is high for a developing market. China recently withdrew from investment in Pakistan due to security concerns.

The Taliban will face the same economic challenges as the previous regime – but under sanctions and with far less international financial support. Afghanistan’s new rulers must face this reality, form an inclusive government and adhere to international standards. Otherwise, they will make themselves and the Afghan people poorer.—bloomberg

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